Bank of America’s announcement on June 29, 2011 that it would take mortgage-related charges of $20.6 billion during the second fiscal quarter has drawn increased scrutiny from the SEC. Under FASB Accounting Standards Codification 450, companies are required to disclose litigation contingencies if the event of loss at least “reasonably possible” to occur. Disclosure of such an event must include an estimate of the possible loss, range of loss or a statement that such an estimate cannot be made. The announcement by Bank of America of greater than expected mortgage-related liabilities has spurred the SEC to closely review the filings of banks to ensure that disclosures provided to shareholders are fair representations of anticipated liabilities. As reported in the Wall Street Journal, the SEC has sent letters to a number of banks asking for improvements to their disclosures and explanations for increases in previously disclosed litigation-related liabilities.
OUR TAKE: Determining the level of exposure and related disclosure for pending litigation, especially when there is little certainty regarding the outcome, is a difficult analysis. When the litigation involves a significant monetary claim, rather than risking increased scrutiny after the fact from the SEC, a company may be better served by disclosing the litigation matter and stating whether it believes the case has any merit.